Set marketing budget to fit your business goals

Throughout my years of working with small-business owners, “How much should I spend on marketing?” is one of the questions I get asked the most.

Is 10 percent of my total revenue too little? Is 20 percent too much?

Unfortunately, the rules are not hard and fast. As a result, most small-business owners just do seat-of-their-pants marketing.

One month, they might advertise with Google AdWords. The next they might try Facebook. And the next month, they might advertise in a local publication when a friend suggests it worked for him.

Or they just don’t market at all. And in the long run, that is disastrous.

So how do you figure out how much to spend? Use two main approaches:

1. Percentage of sales. Some companies set aside a certain percentage of total sales for all their marketing activities, including advertising, public relations, brochures, social media and trade shows.

In other words, if your handmade furniture company had $200,000 in sales in the past year, and you set aside 5 percent for marketing this year, your total marketing budget would be $10,000.

Budgeting this way is tempting. After all, it’s easy.

But it’s also arbitrary.

You may spend too much or way too little. For instance, some companies such as Costco do virtually no advertising.

Advertising isn’t necessary for the giant warehouse store’s success, and it operates on tiny profit margins.

At the other extreme, the online contact-management company Salesforce.com spent $25.4 million on marketing during its first year in business with only $5.4 million in sales — 470 percent of its revenues. That spending has paid off since its yearly sales are now in the billions.

In practice, the bulk of established companies spend 1 percent to 15 percent of total sales on marketing annually. That’s a wide range: For a million-dollar company, the figure could be anywhere from $10,000 to $150,000.

2. Goal-based budgeting. With a goal-based marketing plan and budget, you have to define your business goals and develop a course of action.

If you aim to secure 200 new customers, what will it take to acquire them? How much advertising do you need? At which trade shows do you need to exhibit? Do you need to hire a social-media marketer?

This kind of marketing budget makes the most sense. It also takes the most work.

Of course, you may have to trim back spending to meet the realities of your small company’s finances, but at least the budget is based on what is necessary to accomplish your goals.

In your own business, what factors can help you figure out how much to spend?

• Your profit margin. If you have a low profit margin, you can spend only a small percentage of your revenues on marketing.

Examples of such companies include grocery stores and discount stores. On the other hand, companies with high profit margins can spend a much higher percentage.

If you don’t have to spend a lot on manufacturing, inventory or high rent — say you’re a software, Web-based or service company — you can spend more on marketing.

• Large or hard-to-reach market. If you’re ambitious and trying to reach a very large market, you’ll need a big marketing budget.

That’s why I recommend that smaller companies target smaller markets such as specific industries or geographic areas because the cost is not as high to reach your prospects.

• Newness. If you’re trying to get launched, get noticed or gain traction, you’ll spend a higher percentage of your total dollars than you will need once your company is established.

Yes, a start-up’s revenues are small, but your need to develop a customer base is critical in your early years.

• Aggressive competition. Let’s face it, if your competition spends a lot of money on marketing, you probably will have to spend a lot, too.

Here’s the most important rule: Develop a marketing plan, set aside a marketing budget and then spend it.

You’ve got to get the word out about your business.

Rhonda Abrams is president of The Planning Shop and publisher of books for entrepreneurs. Her most recent book is “Entrepreneurship: A Real-World Approach.” Register for Rhonda’s free newsletter at PlanningShop.com. Twitter: RhondaAbrams. Facebook: facebook.com/RhondaAbramsSmallBusiness.